5 Best Dividend Index Funds for Retirement Income
These high-dividend index funds can reward you in retirement
Waiting for the assets in your retirement portfolio to grow isn't the only way to secure your income in your golden years. Dividends can provide a sustainable income source as well. They're payouts that are issued to the shareholders of a company from its profits.
One way to get exposure to dividend-paying stocks is to invest a portion of your portfolio in a dividend index mutual fund or exchange-traded fund. These funds pay you income in the form of dividends from the company that issues stock held in the fund. They often distribute dividends to the fund that are then funneled to the shareholders.
The distributions from a high-yield dividend index fund can vary. They depend on a certain market index. But companies often pay dividends that grow at a rate greater than that of inflation. Having dividend-paying stock can provide a hedge against inflation. You would still receive dividends to help you maintain your spending level, even if the purchasing power of your assets were to decrease.
The best funds offer a high dividend yield and a low expense ratio—a fund management fee that reduces your return. One or all five of these index funds can be an appropriate addition to a diversified portfolio.
SDY: SPDR S&P Dividend ETF
The SPDR S&P Dividend ETF One of the best dividend index funds. It contains stock in 112 companies that are known as the "dividend aristocrats." They have the highest dividend-yielding stocks listed in the S&P Composite 1500 Index. The firms have increased dividends every year for at least 20 years in a row, giving retirees a constant cash flow.
This fund tracks the S&P High Yield Dividend Aristocrats Index. The current yield, also known as the SEC 30-Day Yield, is 2.52% as of April 2021. The expense ratio is 0.35%.
VIG: Vanguard Dividend Appreciation ETF
The Vanguard Dividend Appreciation ETF contains stocks in 182 companies that have increased dividends in each of the last 10 years. The fund tracks the NASDAQ US Dividend Achievers Select Index (formerly the Dividend Achievers Select Index). The current yield is 1.61% as of April 29, 2021. A passively managed fund, the ETF offers a low expense ratio of 0.06%, which allows you to keep more of your gains.
DVY: iShares Select Dividend ETF
The iShares Select Dividend ETF owns 100 stocks that have paid dividends in each of the past five years. Stocks are screened by dividend yield, dividend-per-share growth rate, and dividend payout ratio.
This fund tracks the Dow Jones U.S. Select Dividend Index. It has a current yield of 3.32% and an expense ratio of 0.39% as of April 2021. An average of 675.55 million shares of the fund traded across all U.S. exchanges over 30 days.
PFF: iShares S&P Preferred and Income Securities ETF
The iShares Preferred and Income Securities ETF is a high-dividend index fund made up of shares of preferred stock. Most of the preferred shares of stock in this fund are issued by financial institutions, such as banks and insurance companies.
The fund tracks the ICE Exchange-Listed Preferred and Hybrid Securities Index. The dividend fund features a current yield of 4.77%. Its expense ratio is 0.46%.
DTD: WisdomTree U.S. Total Dividend Fund
The WisdomTree U.S. Total Dividend Fund owns 667 U.S. stocks that are weighted by expected dividend yield rather than the traditional approach of weighting stocks by a company's market value. This approach allows you to own more stock in companies that pay higher dividends. The fund tends to give the most weight to the information technology and financial sectors.
This fund tracks the Wisdom Tree U.S. Dividend Index. It offers a current 12-month yield of 2.68%. It comes with an expense ratio of 0.28% as of April 2021.
Role of Dividend Index Funds in Your Portfolio
Investing in these index funds exposes you to dividend-paying stocks that can serve as an income stream during retirement. They can hedge against inflation. But dividends are never guaranteed.
A company can choose to reduce or get rid of its dividend at any time, such as during an economic downturn when its profits might fall. The share price will often go down when this happens, which could reduce the value of the assets you invest in the fund.
Dividend-producing investments should be part of a diversified portfolio that you manage through a holistic plan. They should not be used as a sole source of income.
NOTE: The Balance doesn't provide tax or investment services or advice. This information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor. It might not be right for all investors. Investing involves risk, including the loss of principal.